Securities and Exchange Board of India (SEBI): Soma Majumder, Adjudicating Officer, imposed a 25 crore penalty on Yes Bank Ltd. (YBL), and separate penalties on the three senior executives of its private wealth management team for perpetrating fraud on its customers by influencing them to alter their investment positions from fixed deposits (FD) to risky AT-1 bonds.

In the pertinent matter, the Bank was allegedly involved in the sale of AT1 bond fraudulently, which started in 2016 and continued till 2019. It appeared that YBL wanted to free up ‘shelf space’ for institutional investors to subscribe to further capital of YBL. Therefore, the Noticees devised a devious scheme to dump the AT1 bonds on their hapless customers acted through its employees including the three senior executives to perpetrate such fraudulent acts on its hapless and unsuspecting customers, some of whom were influenced to even alter their investment positions from FDs to these risky AT1 bonds. In order to do that, the Noticees highlighted the AT1 bonds as earning high interest vis-à-vis the FDs. The omission on the part of the Noticees to forward the relevant documentation to the investors customers indicated suppression of material facts and thus misrepresentation Some of the customers also closed the FDs and used the money to buy the AT1 bonds.

Noticee 1 had put forth 52 submissions and Noticee 2 had put 15 additional submissions.

While addressing the demand of the Noticees to cross-examine the complainants, it was held that, “…I note that while the impugned complaints have been the basis of initiation of investigation by SEBI, the charges in the SCN have been alleged on the basis of the detailed fact-finding which investigation conducted. Cross-examination is meant for assisting the Noticees to rebut the evidence against them while contesting the matter. However, since the complaints of the investors are not primarily relied upon in this proceedings, the question of cross-examination does not arise and hence no prejudice is caused to the Noticees by not acceding to their request for cross-examination…”.

The tribunal after looking into all the submissions so made, took note of all the evidences, documents and the proximate facts and circumstances, and was thus of the opinion that “It is clear that to further their own cause, the Noticees devised a scheme to purposely suppress the risk factors of the AT-1 bonds and to highlight the attractive features and also distorted and misrepresented the material facts, so that their customers could be influenced to invest in these risky bonds, some of who also shifted their investments from FDs to these bonds. It is clear that the Noticees had an intention to defraud the customers while making the sales pitch to their customers which is why they did not institute any of the aforesaid safeguards. It cannot be a matter of coincidence that such a large number of customers, i.e. 1311, were influenced and induced to invest in these risky bonds…”.

It further observed that, “It is seen from the facts of the instant case that these AT-1 bonds were ‘down sold’ in order to make ‘shelf space’ for the Institutional Investors to subscribe to further capital which may be issued by the YBL. So it was in the interest of Noticee1 to make shelf space and make the Institutional investors to subscribe to further capital and therefore Noticee 1 decided to facilitate the down selling of these AT-1 bonds…”.

It also took note of the fact that I note that initially, AT1 bonds were allowed to be issued only to institutional investors. Thereafter, vide its circular dated September 01, 2014, RBI allowed Banks to issue AT1 Bonds to individual investors but also mandated issuers to appropriately disclose to the investors, the unique features along with the risks associated with the bonds. And therefore, the issuer had the fiduciary duty to make sure that the features and risks of the instrument were known to the investors. And the difference between a subordinated bond and a fixed deposit should have been made clear while highlighting that it is not covered by deposit insurance.

Therefore the Tribunal exclaimed that,“ I conclude that the AT-1 bonds were sold to the customers of YBL by the Noticees without adopting adequate safeguards to protect their interests and without sufficient due diligence”. “…I conclude that the allegation that Noticees 1 to 4 violated Regulations 3(a), 3(c), 3(d) and 4(1) of PFUTP Regulations and Sections 12A(b) & 12A(c) of the SEBI Act and Noticees 1 and 2 also violated Regulation 4(2)(s) of PFUTP Regulations, read with Explanation (1) to Regulation 4(2) of PFUTP Regulations stands established. Further, Noticees 3 and 4 have submitted that the amendment to Section 4(2)(s) of PFUTP Regulations came into effect only in February 2019 after they had left the employment of YBL…”.

Resultantly a penalty of 25 crores was imposed on Yes Bank Ltd. a penalty of Rs 1 crore on Vivek Kanwar, head of private wealth management, and Rs 50 lakh each on Ashish Nasa and Jasjit Singh Banga.[Yes Bank Limited, In re, Order/SM/MG/2021-22/11306-11309, decided on 12-04-2021]

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